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No one likes to waste money.
When Alan and I were newly married, we thought renting was a waste of our money. And we didn't have that much money, so, of course, we wanted to stop throwing it away!
But our (misguided) beliefs on renting vs. buying led us to buy a house before we were ready. And before we could truly afford it.
We dove into homeownership far too soon in two instances. In the end, we spent thousands more than if we’d rented longer.
This article shares our story and why we should have continued to rent instead of buying a house.
The idea of “rent is a waste of money.”
We bought into the adage that renting is a waste of money. I can't say precisely where it came from—family, friends, or society. No matter, it was there, and to us, buying a home felt like an urgent financial matter.
There is some rationale there. In certain circumstances, buying can make more sense than renting. Becoming a homeowner might make sense if:
- The mortgage payment costs much less than rent.
- You know you’ll live there for several years.
- You plan to pay off the mortgage.
Yet, some folks buy a home because they consider it an investment (that was us).
While it’s true that real estate can appreciate, it usually doesn’t rise much more than inflation. And, in most cases, it shouldn’t be a primary reason for buying over renting. But we were young and didn't think it through.
We wanted to own a home. So, we rationalized it by considering it an investment.
Plus, it felt less wasteful than rent since the principal payment helped pay off the house.
This thinking led to us purchasing two homes within a year – to avoid rent. But in the end, it cost us much more than renting.
Why? Most of all, we didn't understand the hidden costs of buying and owning real estate.
Also, we had to move within three months of buying House #1 and rushed to buy House #2 in the new location. In hindsight, neither home made financial nor logistical sense.
Two homes in one year
We were fresh out of college and newly married when we bought House #1 – we thought it made financial sense. But also, we were impatient to be homeowners.
We didn't fully understand the costs besides the mortgage payment, and they added up. For example, there were realtor fees, property taxes, insurance, repairs, maintenance, and more. But, we weren't at all prepared for those hidden expenses.
House #1. We had little savings, so we had a small down payment. On top of that, the loan was a 7/1 adjustable-rate mortgage (ARM) with Private Mortgage Insurance (PMI). Ouch.
After three months, Alan got a new job in a new city, and we put the house up for sale. Thankfully, we sold the house in a couple of months. And the company paid our moving expenses, including realtor fees.
Otherwise, we wouldn’t have been able to afford the move.
House #2. We were unfamiliar with the new city and couldn’t find anything comparable to House #1. But we felt rushed to find a new home fast. And we still wanted to avoid renting. So, we settled for House #2.
But, soon after, our first child was born, and we felt squeezed for space. So we put House #2 on the market.
Unfortunately, we paid a few thousand dollars to sell House #2 (for realtor fees). This mistake cost us part of a down payment on House #3, putting us further in debt.
Why We Should Have Kept Renting
Better cash flow.
Our mortgage payment was more than rent. Property taxes and homeowners insurance bumped up the monthly costs.* And, since we had a small down payment, we had Private Mortgage Insurance (PMI) on top of that!
If we had kept renting, we would have had more monthly cash flow.
*I will date myself, but online mortgage calculators and other tools weren’t available! We could do some research, but it was hard to estimate exact costs.
To save more (i.e., opportunity cost).
What if we saved all the money spent on down payments, PMI, homeowner’s insurance, repairs, and maintenance?
Renting longer would have given us time to save an emergency fund. Plus, it might have allowed us to afford a home that better fit our needs later.
To take on less risk.
Little savings, a variable interest loan, and PMI add up to a considerable financial risk. If emergency expenses popped up, we would’ve been in trouble.
Also, if Alan’s company hadn’t paid our moving expenses for House #1? He would have passed up a great career opportunity – because we wouldn’t have been able to afford to move.
To be more flexible.
To our credit, we planned on staying in both homes longer. But we were young, and things changed fast. As a result, we only lived in House #1 for three months and House #2 for 16 months.
Renting would have allowed us to be flexible with our finances and location. So, we could have had more savings, and moving would have been much more manageable. But, unfortunately, in both situations, having to sell a house complicated everything. And if we hadn’t been able to sell, we would have been stuck.
To lower stress.
To say that buying and selling a home is stressful is an understatement. We learned a lot going through the process, but it was nerve-wracking.
Some thoughts were, what if we can’t sell the house? What if we had a major repair? What if we experienced job loss? What if we can’t afford to move?
Buying a home can and does make sense for many people; it's a place of your own, and it builds equity. But it's not for everyone, and it doesn't always make sense.
We became homeowners too soon, and it cost us in many ways. We're fortunate to have gotten through relatively unscathed.
And, though it worked out in the end, it could have been devastating to our finances. (Happily, we eventually recovered and raised our kids in House #3!)